agilon health, inc. (AGL) Earnings Call Transcript & Summary

All right. Thank you, everyone, for coming. For those of you who don't know me, my name is Adam Ron. I cover managed care and health care services here at Bank of America with Kevin Fischbeck, with a particular focus on value-based care and companies like Agilon. Agilon is a physician enablement company that helps doctors transition to value-based care, particularly in Medicare Advantage. Today, from the company, we have: Tim Bensley, the CFO; Kenny Bellendir, the Markets Chief Financial Officer; and Matthew Gillmor from Investor Relations. And with that, we'll get started.

So you reported Q1 earnings earlier this week. How would you characterize the performance year-to-date? Because there were a few moving pieces. The medical margin was at the lower end of the guidance, but there was PYD in there. And so how would you characterize the same period performance and then what happened in 2022?

Yes, sure. Let me talk about. First of all, Adam, thanks for having us. And great crowd for a Thursday, the last day of the conference. Thanks everybody for hanging in there for us today. Yes, I mean, we put up a really strong first quarter following a strong 2022, I think. We'll certainly talk about medical margin. When you started at the top, I mean, one of the highlights of the quarter was very, very strong -- I'm sorry, a very strong membership and revenue growth again. We ended the quarter with more than 400,000 MA members, which is pretty far above the high end of our range. That includes a number of -- all of these new markets that we brought on that we've been implementing for the last year, but also about 14% same geography growth, and that's really the hallmark of how we drive growth. I think that membership was up 61%, MA membership year-over-year. And it really just demonstrates, I think, the strength of the model where we're out there year-over-year, adding markets, adding new members, building success and that just becomes a great point of attraction for other new partners and other new physicians to join the network, and that's been working phenomenally well for us. So very, very happy about the membership growth. And by the way, that also allowed us to give more confidence in our membership projection for the year and now we're saying our membership growth will be certainly more towards what was the high end of our previous guidance. We've tightened that up. And because we have more members on early, and we'll come back to this medical margin in a second, our average membership for the year, our ability to drive medical margin with those members will be obviously greater for the year. And obviously, we have them on the platform earlier to be generating medical margin in 2024 and beyond. So very, very happy about the membership side of it. From medical margin side, the absolute number, I think, is fantastic. $162 million of overall medical margin. That's $135 on a PMPM basis. I think that's up 17% on a PMPM basis. The dollars were up 88%. But one of the things we've always talked about is our Year 1 members, our Year 1 markets really don't generate a lot of medical margin usually for this year around, say, $45 or so on a PMPM basis and not a lot of EBITDA flow through. Most of that is coming from our Year 2-plus markets. Our Year 2-plus markets in this quarter, we're generating $178 of medical margin PMPM, which I think is up 47%. So it was like $121 last year. So the overall -- and I think even including the PYD, that medical margin on a percentage of revenue or our MLR improvement was about 110 basis points. So any way we look at that, it feels like very strong performance on a year-over-year basis. And just as showing continued really strong momentum in terms of our cohort maturation on medical margin, much like, I think, on track with what we shared at the Investor Day. So to your point, within that number is about $12 million of prior year development in the medical margin number. A number of things were driving that coming through last year. Typically, that $12 million would flow through a little less than 50% EBITDA. So there's probably about a $5 million negative impact in the quarter in EBITDA, $12 million negative impact on development. And all the things that I talked about, early members coming on, really great confidence in our clinical programs that are driving that medical margin, which Kenny can talk a little bit about in a second, just gives us continued confidence that notwithstanding that $12 million of prior year development that we're very comfortable with our full year medical margin guidance, and we reaffirm that guidance on the call. Just a couple of other quick things to categorize or to put some character around the quarter. We feel good about our ability to take that medical margin and get leverage to drive through to EBITDA. Our platform support costs, which all those platform resources are very important to driving our business but we get great leverage against them. We got another 100 basis points off platform support costs as a percentage of revenue, dropped to 4.2% from 5.2% last year. So that's another good movement. We've been taking that 100 basis points or so of leverage every year in platform supporting costs. And then the last part is it's not the biggest part of our business but we're pretty pleased with how the ACO REACH. -- I guess this is the first year of ACO REACH as we transition to our direct contracting, pretty pleased with how that's worked. I think everybody knows there's a few headwinds to ACO REACH this year. This is the last year that they've increased the global discount up to 3%. That notwithstanding with that as well as a few less members since we didn't start in a new ACO REACH markets this year. We put up about $3.3 million of EBITDA contribution from ACO REACH. That's pretty much the same as what we did last year on a little bit more membership without that headwind. So we're seeing good underlying medical margin progression and performance in ACO REACH as well. And that allowed us to say, for our guidance going forward, we're more comfortable now with the high end of our $5 million to $10 million of contribution from ACO REACH this year, and remain confident in our overall EBITDA guidance. And the last thing -- sorry to run on, but just this is good because the whole category -- the whole character of the quarter. I also said we're again, very confident in the numbers that we put out for 2024 membership. I think we have actually now named five of the new partners that are coming on, a very diverse group, including a couple of health systems. A couple of more health systems, including -- in addition to main health that we went live with this year. And so our ability to now in 2024, jump up membership by another about 145,000 members feels very, very, very confident in that. And Steve, on the call talked about -- Steve Sell, our CEO, on the call talked about we're seeing great momentum in the class of 2025 progression as well now. So I don't know if you want to go to another question, it might be interesting. One of the things we talk about is how well medical margin is progressing. Notwithstanding the prior period development, we were able to put up a pretty strong number. And that's really driven by the underlying clinical programs and the progression we're making them. And Kenny Bellendir, who's our Senior Vice President and CFO of our Markets has -- I think we got the correct number now is like employee #4 at agilon. So he's been here the whole way along and is really responsible for supporting and guiding those programs, how we track them, how we implement them across all of our markets. So it might be interesting for you to just talk a little bit about how those programs are working and how that's driving our medical margin?

Yes, absolutely. So as we think about the clinical programs that we're rolling out, what we're really focused on and what we're doing is really building on the success that we've had from a BOI and quality standpoint, implementing those early in our life or early in our partnership life cycle. So now applying that same level of rigor monitoring education to these various clinical programs around kind of our highest-cost patients. And so much of this is new to some of the PCPs that are coming from a fee-for-service world. They didn't have to worry about renal spend or palliative care when they weren't properly incentivized to do so. And so as I've mentioned, we're now bringing that same level of rigor and kind of performance monitoring to the clinical programs that we did to the burden of illness program. And so just a couple of examples of that, we've rolled out our palliative care program now in six markets. And just like on the BOI side, where a physician would see all of the potential diagnoses that a patient has right there at the point of service. They're now being palliative risk score as well. So that palliative score is based on our own internal algorithms, basically, the likelihood of an unfortunate event in the coming time period. And so we put that information right in front of the PCP as they're with the patient. And we think a referral to palliative is appropriate here. They either do or do not make that referral, but we're tracking that all in real time, and really focused on driving out variability within the physicians to bring kind of low performers up to the high end is just like we've done in BOI. So very similar on the renal program side where we know which patients have kind of CKD 3, 4, 5. These are very expensive patients. We've now got this extension of the care team that we can refer patients into for renal disease but very similar. We're feeding that information to the PCP right at the time of the visit, easy for them to make the referral over. And then if that is not happening, for some reason, easy for us to circle back and see why not. I think as Tim has mentioned, we're very encouraged by that. As Steve mentioned on our Q1 call, just in the first quarter alone, we've enrolled thousands of patients in these programs and picking up momentum. So in 10 markets on renal, 6 in palliative, we're in 27 markets and the idea is that over -- in the very kind of near to short term we're rolling these programs out across all markets and learning from them.

Great. Sticking on the topic of markets. So at the Investor Day, you showed a slide about breaking down all your cohort economics. And for 2018 and 2020, which are fairly large in terms of membership, there was a very significant step-up in terms of medical margin PMPM. And so just wondering how those markets are progressing against that year-over-year increase? And how much these programs like renal and palliative are part of that?

Yes. No, absolutely. The -- a couple of components to that question. The first thing is the numbers that we've seen coming through Q1, as we exited active numbers we've seen exiting 2022 and as we've now completed Q1, are very much right on track with what we expected across our markets cohorts for delivering 2023 and being ready to transition to 2024. There's a couple of things that drive that point of inflection this year. One of them is this is just a year where there's higher than normal benchmark increases on the revenue side. And for us, because our model is -- so to the second part of your question, our model is so geared to improving the quality and outcome for our patients that actually drives cost down. When there is a pretty good high benchmark year, the differential between that benchmark revenue rate and what we're doing in cost just gets wider. And so that drives a higher point of inflection because our costs continue to just go in the right direction because of all the things that Kenny was talking about. So across those market cohorts, specifically 2018, which is really our inaugural partner market in Columbus with Central Ohio Primary Care and then our 2019 cohort and then our 2020 cohort, which is the other one you're talking about, which have pretty big points of inflection are all like doing very well coming through the first quarter and actually exited the year last year very strongly as well. Again, in terms of components of what's driving it. I mean, really when you get those more mature cohorts, now when you're into year 5, 6 in some of these cohorts, the primary thing driving our medical margin expansion is the length of time that those members have been on the platform in those markets and have benefited from all the things that our model does to help improve the quality and cost of those outcomes. And the programs that Kenny is talking about is a big part of that. So those cohorts on the cost side are being really primarily driven -- on the medical margin improvement are really being driven by cost. And then obviously, the cost differential benchmark is higher in a year like this, so.

Okay. Great. So you made that was straight no. So you mentioned...

Adam, if I could add one thing to that. I think there's one part of the business just in terms of the Medicare Advantage business that there is a prospective element in terms of the drivers. So the activity you do in 2022 gives you visibility into the drivers of the business in 2023. And that has to do with documentation, how you're doing on quality. It has to do with your payer contracting. And then, of course, we've got visibility into the underlying membership growth on those curves, too. And Tim talked about the dilution that growth can cause. So I would just add that in terms of the content.

Yes, that's a really good point because when you think about the revenue -- we have obviously a pretty big revenue PMPM uptick forecast this year, but that's the part of the business that is the most known because the things that are driving revenue really are known when you into the year because it's the benchmark as well as it's the wrap, the burden illness work that we did last year that helped us this year. Now we don't have perfect visibility to mix and exactly how everything is going to come out. But the revenue side is a lot more kind of a known quantity going into it. So that would give us even more increased confidence in the 2023 outlook. But again, in a benchmark -- a year of high benchmark with how our cost programs work, you just have a -- you can get a better spread of that. And so it will be a good year for us for those years in terms of point of inflection. Is there anything else on the -- what's driving our older markets or anything from a programming standpoint that you wanted to jump in with or add to?

I would just say the kind of coming out of the pandemic, I think last year had a much better opportunity to get patients in seeing more of our patients. And so we took a little bit of a step-up in terms of our overall BOI performance relative to the prior year, which is going to contribute a little bit to that.

Yes. And to Matt's point, that I think is on the revenue side, it's more of a known quantity in our projections and forecast then. I mean, obviously, we're very confident in the cost side as well. But you do the work on the cost side in the year, the revenue side is kind of something you know more of going into a year or so.

Okay. Great. So you talked a lot about the benchmark in that answer, and so that's a good segue into maybe 2024. So obviously, next year, the benchmark isn't as generous. And part of that is the risk model revision and Humana had talked about on their call how they see it as a net headwind even net of benefit design changes to the primary care business that they own. And this is something I talked to you about on the earnings call that I'd like to dig more into is one of the drivers you mentioned that you think leave you less exposed is that you're in markets that aren't as penetrated in value-based care, but Humanas in markets that are very penetrated and to me, that might even be better because then all the providers are equally seeing high wrap scores. And so MA plans would have to adjust benefits equally down and so they wouldn't as much of a net headwind potentially in markets where value-based care is more penetrated in newer markets, you might be more of an outlier. So like how do you think about those 2 dynamics?

Yes. I think generally speaking, I mean, of course, we're talking about the advanced rate notice is an impact on revenue rate because of the restructure of the -- of risk adjustment essentially, markets or at any level of market the group that has overall higher risk adjustment overall higher as where it's going to be disproportionately in agri. So whether or not we're in -- I don't think the penetration of value-based care is a big driver as just our presence in those markets, we have more of a full bell curve and a lower overall risk.

That would be the growth impact, but the net of pay or benefit is unchanged?

Yes. So no, that's absolutely a great question. So one of the things that we've said is it will be different. And I think Humana, I think, said this as well. What they do with benefits versus the rate notice will be different market-to-market, driven by a lot of the things that you said. And our markets are not [ large ]. So obviously, we'll have a different impact on one versus the other. But one of the things we said was of the levers that we have to go pull any kind of benefits compression is sort of just what I would call derisking our ability to get to the number, but we're very confident in our ability to deliver what we need to in 2024 on our progression to 2026 with or without any significant benefit compression. So we're not counting on that. I do think that we have markets that -- what we're seeing in terms of where we are and what the impact is that market that we will likely across payers see some benefit compression in our market. I mean, it's not going to be I'm sure as high market that have super high RAS scores that are going to see a bigger impact. But we're not reliant on benefits compression to hit our number. But I think we will see some across payers in the -- in some of our markets as well.

Just to remind the audience, in terms of the levers that we have in our business that we feel confident about that are -- so why don't we just ask?

I don't know, Ken, do you want to talk a little bit about the -- or maybe if I can just start on when we're looking at a couple of things that when we're looking at the impact of it, first of all, is we have really strong operations that will allow us to implement the changes very effectively without kind of leaving anything on the table. So we have a very good, strong BOI program, a very good strong BOI infrastructure that will allow us to work with our providers and make sure that everything is done correctly and that we transitioned to the new version very quickly. The second thing is our model is really driven around improving the quality and overall health outcome of our members, and therefore, is really more based on what we're doing to drive cost. And we are seeing -- we're really, really impressed with -- as Kenny was talking about earlier, about the progress that we're making against those programs. And as those accelerate, we believe that gives us some air cover from it as well. And the last thing is, and it's one of the first things I talked about when we sat down up here is we are just getting members on the platform earlier than we thought when we're putting out guidance over the last few years, and that early membership coming on just generates more credible margin dollars earlier and gives us a lot of air cover against those projections going forward as well. So I mean think more membership quicker, continue to accelerate and get great value out of our clinical programs and our ability to really manage the changes very tightly in our operation. Those are at least three of the things. I don't know if you guys -- anything else you want to tack on to?